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China's VAT reform
On 1st August 2013, China’s new Value-Added Tax (VAT) reform is extended nationwide. This reform implies the shift from turnover tax (Business Tax - BT) to a value-added tax across many industries and service types, including transportation services and logistics-related services.
Such a geographical extension represents a continuation of the pilot business tax/value added tax reform, launched on 1st January 2012 in Shanghai and which was later rolled out to eight other cities/provinces during 2012. The nationwide rollout has been anticipated because of the distortion in competition created by the pilot program in certain areas. This decision has been formally endorsed through Tax Circular Caishui No. 37 which was issued by the People's Republic of China's Ministry of Finance and the State Administration of Taxation in May 2013.
From 1st August 2013, the VAT rate charged on freight operators is 11% for transport services and 6% for logistics and ancillary services.
- Activities included in transport services: dispatching cargoes or passengers to the destination by means of transportation vehicles, including land, water, air and pipeline (rail transportation is specifically excluded);
- Activities included in logistics and ancillary services: aviation services, port services, freight and passenger station services, salvage rescue services, freight forwarding services, customs clearance services, warehousing services and material handling services.
||It is noteworthy that the Tax Circular for nationwide VAT implementation abolishes certain policies existing under the VAT pilot. Under the VAT pilot, forwarders and other transportation providers could effectively invoice international transportation and freight forwarding services as "VAT Inclusive” – without billing the VAT to client shippers. Circular 37 prohibits this practice and the 6% VAT will be collected on freight charges payable within the PRC. The 6% VAT will be collected on behalf of and remitted to the government.
According to Universal Cargo Management, a Freight Forwarder and Ocean Transportation Intermediary based in the US: "VAT means an additional 6% cost for international shippers importing and exporting from and to China”1. This conclusion seems to be shared by the major carriers operating shipping lines in China (Maersk, Hamburg Süd, and MSC), which have already sent letters to their customers stipulating that "an additional 6% Value-Added Tax (VAT) will be levied on top of the freight and charges payable at China starting from 1 August 2013, based on the issuance date of the VAT invoice”.
However, according to detailed reports from accounting firms KPMG and Deloitte, the situation is much more complicated. Both firms explain that the Tax Circular Caishui No. 37 brings clarifications on certain loopholes observed during the Pilot phase. But at the same time, a lot of uncertainty remains especially on the precise scope of the VAT scheme and its exemptions, as well as on the distinction between domestic services and international services (for instance only domestic aviation is subject to VAT regime), or even the VAT regime to be applied on foreign operators from countries having or not a bilateral agreement with China.
The current situation appears to be confused, as is indicated by the example of the HK Shippers’ Council which wondered: "International shipping is not liable for VAT, so why should carriers impose a six percent VAT levy on customers?”. In the meantime, Maersk Line has decided to wait until mid-August before levying the six percent VAT on mainland charges to see how the situation unfolds.
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